We examine the empirical performance of New-Keynesian Phillips Curve (NKPC) in explaining Japanese inflation dynamics. In order to obtain a better proxy of Japan's real marginal cost (RMC), we correct labor share by incorporating labor adjustment costs and the influence of material prices. Our approach is unique in utilizing the information about firms' judgment on labor gap, which implies the existence of labor adjustment costs. In doing so, we take into account the existence of real wage rigidity, which is brought by some imperfections or frictions in the labor market. The main findings are summarized as follows. First, if we use labor share, the performance of Japanese NKPC is quite poor, which suggests that labor share is not a good proxy of RMC in Japan. Second, if we correct labor share by incorporating labor adjustment costs with considering the existence of real wage rigidity, the fit of NKPC is remarkably improved. Third, if we additionally incorporate the influence of material prices, the fit of Japanese NKPC is further improved, and the resulting persistence of RMC accounts for most of the Japanese inflation persistence. These findings suggest that NKPC is a useful framework in explaining Japanese inflation dynamics if we use a better proxy of RMC by incorporating labor adjustment costs, real wage rigidity, and the influence of material prices.

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